Considerations for a company's international expansion include different methods for finding and developing talent.
Just weeks after opening in April 1992, the $5 billion Euro Disneyland outside of Paris was in trouble. Ten percent of its employees had quit, protesting farmers blocked the entrance with tractors, and critics condemned the pollution of French culture. By August, annual attendance projections were slashed by millions; by 1994 there were rumors of bankruptcy. How could Disney, a hugely successful and highly respected company with a worldwide brand and a record of successful international expansion, find itself in this unenviable position?
Even for the most successful companies, international expansion can be exceedingly difficult. From world-renowned operations such as Disney to fast-growing start-ups like Groupon, the unexpected challenges—and even failures—of expanding overseas often can be attributed to people. When a firm is contemplating expansion, who it hires, how it trains and manages those people, and how effectively it ensures that the culture and competitive advantages that sustain the parent company are translated to a country's specific market and culture are critical determinants of success.
Selecting the right talent
Successful international expansion hinges on having the right talent. Hiring overseas is about more than identifying top performers; it also is about understanding the constraints in attracting and ultimately retaining talent.
There are two primary approaches to staffing an overseas operation: Send existing home-country staff (expats) or recruit talent locally. The right staffing decision will be the product of a set of unique, often complex, and constantly evolving factors specific to the firm in question. These factors include but are not limited to the industry, company size, budget, and the market, labor force, and laws of the target country.
There are several advantages to deploying expats to launch and operate a new overseas office. They are known quantities with track records of performance who already are familiar with the operations, culture, and leadership of the company. However, expats are much more expensive. Including travel, visa, and relocation allowances, expats can cost two to three times more than their home-country salary. Moreover, expats might lack the necessary familiarity with the local market or business culture and, in the long run, can burn out or send signals to local employees that they do not have an opportunity to advance.
Despite their advantages, expats often are the wrong choice. Groupon's expansion to China was unsuccessful largely because the company sent home-office employees to remote parts of China expecting to break into an already competitive market. Without understanding the basis of competition for supplier relationships, how to reach potential customers, or how to train and motivate local sales staffs, the expats were ineffective and the company was dismissed by some as arrogant. Local talent almost certainly would have better served Groupon.
Locals speak the language, understand the nuances of local business practices, and have strong professional and personal networks. They also tend to be significantly cheaper than expats, even in countries that have high labor costs. These advantages likely explain why, according to a 2012 PricewaterhouseCoopers survey, 70 percent of U.S. companies with overseas operations planned to hire locals, while only 19 percent were planning to use expats.
Hiring locally does have its limitations, however. Locals are likely unfamiliar with the company and, therefore, may not be able to exactly replicate a company's structure and operations overnight in the way that an expat could.
Finding the right talent in a new country may be more difficult than anticipated. In Euro Disneyland's case, finding top talent for its restaurants proved surprisingly hard considering Paris's celebrated culinary culture. Counting on tapping the local talent market, Disney found that the best chefs were reluctant to consider it as a potential employer both because the park is located well outside of the city and because potential candidates incorrectly assumed they would be limited to flipping burgers.
Disney's purpose-built fine dining restaurants could not overcome the adverse reaction local talent had to its brand. In the end, Disney had to undertake a tricky headhunting exercise across Dutch culinary schools and U.S. hotel chains.
Because a company's prime recruiting tools (brand, professional networks, career opportunities) will be less effective in a new market, often the most efficient way to locate local talent is to retain a local recruitment process outsourcing (RPO) company. Experience suggests that when retaining an RPO in an unfamiliar market, it is preferable to use an ad hoc approach in which the RPO is paid one-third of its fee upfront, one-third upon presentation of a short list of candidates, and the final third when the new hire begins work.
Foreign entity structure considerations
Legal entities are the means by which local authorities recognize taxable presences—or permanent establishments—in their country, and the means by which employers may legally engage employees.
The rights, responsibilities, liabilities, and powers of overseas entities vary from country to country, though they generally adhere to the same general scheme in which representative offices are the lightest touch and local subsidiaries the heaviest. Of course, the company structure ultimately must be dictated by business intent. For example, a company seeking to build stores could not use a representative office. Where there is discretion in entity type, firms would be wise to consider the implications of entity structure on hiring for three primary reasons.
First, the entity type serves as a signaling device whereby a company indicates its commitment to a market and creates a commercial footprint and brand, all of which can assist in the recruiting and retention of employees.
Second, the entity type dictates the speed with which it can be registered and, in turn, staffed. If a local presence is needed immediately—either to conduct pressing business or to secure in-demand talent—a representative or branch office might be best. Companies must be mindful that these entity types carry their own unique risks.
A representative office, for example, typically limits the types of activities an employee may carry out. Employees would not have the authority to enter into contract negotiations on behalf of the parent company and would not be able to work out of a company-rented office or receive any home-office allowances.
HR must be particularly careful when drafting job titles and descriptions for employees who operate under a representative office. An employee title containing the word "sales," for example, may lead local tax authorities to conclude that revenue-generating activities are being carried out, which typically is illegal under a representative office.
Third, in certain countries, the entity structure will affect employee benefits. For example, an entity without the authority to have a bank account might be limited in healthcare coverage programs it can offer to employees.
So, if you hire the most talented salesperson from day one, it may prove a frustrating experience because that person may feel restricted in his activities and underwhelmed by the benefits. The goal is to hire the best talent available, but a balance must be struck between talent and experience, and a willingness to be flexible and act within the constraints of the chosen entity type and the company's own developmental stage.
Establishing onboarding and training overseas
There is far more to hiring local talent than finding the man or woman for the job. It is essential that companies establish robust HR administration and provide effective training and talent management. Questions such as what benefits employees will receive, how they will be onboarded, and how they will be developed are important and worth considering well in advance.
One of most basic elements of any HR program is the provision of employee compensation and benefits. The specific laws and customs that govern compensation and benefits packages often vary significantly, so benchmarking for the target market must take place prior to expansion.
Among the most important factors to consider are what local talent will expect and are entitled to; the local requirements for employment, which in some places are more stringent than in the United States; and the terms of employment and grounds for termination. Address these issues before making offers to avoid confusing new hires, potentially violating local laws, and creating headaches for home-office HR departments.
Keep in mind that just because a benefit is offered in the United States does not mean it is necessary in the target country. Conversely, benefits uncommon at home might be the norm in the target country. Finally, whenever possible it is best to keep the number of benefits-package permutations to a minimum to reduce complexity.
The onboarding and training process also is quite important. It might be tempting to assume that the same regime of courses and the employee handbook that work in the United States will work in the new country. They may work in Canada, say, but in significantly different cultures they likely won't.
When Disney attempted to export its training and culture of customer services in whole to France, the company ran into problems. Cultural differences, discrepancies between corporate and employee expectations, and hectic working conditions led to attrition. According to a report, in the first nine weeks of the park's operation, approximately 1,000 employees quit or were terminated. Some departing employees blamed Disney's lack of understanding of Europeans.
In some cases, laws or cultural norms may dictate country-specific training programs or significant changes to existing curricula. At the least, any instructors sent from the United States must be considerate of local sensibilities.
Preparing expats for success
If your company decides to deploy expats, consider the significant demands of sending home-country employees overseas and preparing them for success. There are four primary issues of concern that merit careful consideration before an employee is sent abroad.
First, what are the immigration requirements of the new country? If an expat fails to comply with local immigration and labor requirements, her employer may be fined or even barred from operating in the country.
Second, not all employees are created equal. It is worth spending time finding the right employee for the new assignment. The employee should have a clear understanding of her assignment and relocation package. To that end, it is best to spell these out in a detailed assignment letter.
Next, proper corporate tax planning and design of the expat's compensation is necessary to ensure optimized taxation strategies for both the company and the employee. For the former, there might be immense complexity in intercompany agreements and entity structure. For the latter, one must be particularly mindful that the expat might be subject to taxes in both the new country and the United States and adjust accordingly.
Finally, offer cultural, language, and technical training to help the expat integrate with local staff, operate in the local business community, and adjust to life overseas. Offering local training sessions to the expat's family also can help with the adjustment and reduce the chances of burnout.
Recruiting and retaining the best talent is a key ingredient of a successful international expansion. But, as Disney found out, it is no guarantee.
Today, more than 20 years since its inauspicious opening, Euro Disneyland—since renamed Disneyland Paris—has a host of well-staffed restaurants and nary a tractor in sight, but a strong argument can be made that success remains elusive. Whatever the case, it's clear that the world is smaller than ever and international operations are increasingly important. The axiom that people are a company's most valuable asset is truer than ever when expanding overseas. Deliberate consideration for talent acquisition and management will do as much as anything to bring about success.